December 24, 2009

One of the year’s biggest corporate-crime blockbusters, and the New York Times publishes it on Christmas Eve, when as few people as possible will read it: In “Banks Bundled Bad Debt, Bet Against It and Won,”Gretchen Morgenson and Louise Story reveal how Goldman Sachs (and others) gamed the system, peddling those bullshit and crazily shaky collateralized debt obligations (CDOs) built on shakier mortgages and then making billions by betting against those very CDOs.

This quote in the otherwise dry NYT story says it best:

“The simultaneous selling of securities to customers and shorting them because they believed they were going to default is the most cynical use of credit information that I have ever seen,” said Sylvain R. Raynes, an expert in structured finance at R & R Consulting in New York. “When you buy protection against an event that you have a hand in causing, you are buying fire insurance on someone else’s house and then committing arson.”

Probes are supposedly under way, the NYT story says, but that won’t mean much. One of the smaller firms that peddled these CDOs and then bet against them was Tricadia, whose parent firm is controlled by Lewis Sachs, now a special counselor to Treasury Secretary Tim Geithner.

Goldman itself has posted a response to the NYT story; the firm doesn’t really dispute any of the facts but says in general that, yeah, this is the way the game’s played.

For a we-told-you-so, plus valuable info on how such CDO chicanery took place, go back to Jim Lieber‘s two pieces in the Voice this year, “What Cooked the World’s Economy?” (January 28) and “No Justice” (October 27).